FTAA in Perspective: North-South and South-South Agreements in the Western Hemispheric Countries Inter-American Development Bank Masakazu Watanuki Josefina Monteagudo June 5-7, 2002
Evolution of Regionalism in the Western Hemisphere The second wave of regionalism has gained momentum in the Western Hemisphere Renewal of LAC s Old Regional Initiatives * LAFTA LAIA * Andean Community * Central American Common Market (CACM) * Caribbean Community and Common Market (CARICOM) Creation of New Trade Blocs * NAFTA * MERCOSUR * FTAA * MERCOSUR-EU
Policy Questions/Objectives of the Study What is the potential impact of the respective integration options for hemispheric members? What pattern of structural transformation does each country or regional bloc undergo? How different is the North-South approach in comparison with the South-South arrangement? What is the role of Latin America in the FTAA for the respective LAC s members?
Main Features of the CGE Model (I) Model: Multi-region, multi-sector, comparative static Production Sectors: Constant Elasticity of Substitution (CES) Demand: Final Demand: Utility Maximization by Household Intermediates: Fixed Input-Output Coefficients Trade: Imperfect substitution Exports: Constant Elasticity of Transformation (CET) Imports: Constant Elasticity of Substitution (CES) Factors: Land Capital Labor Base Year: 1997
Main Features of the CGE Model (II) Trade-linked Externalities: Melo and Robinson (1992) * Sectoral Export Externality SAD k i = ( ) k k EK / EK i ηe * Import Externality of Capital and Intermediate Goods SAD * Aggregate Export Externality SAC 0i k ( ) k k ηm MTOT / MTOT + (1 n ) k 2i = ni 0 i k = ( ) k k ETOT / ETOT Scale Economies: Melo and Tarr (1992) * Contestable Markets for Manufacturing Industries 0 ηk k k
Sectors in the CGE Model Primary Sectors Heavy Manufactures Grains Petroleum and Chemicals Vegetables, Oilseeds & Soybeans Iron and Steel Sugarcane & Other Crops Automobiles and Parts Livestock Machinery and Equipment Mining Light Manufactures Meat Products Processed Foods Textiles and Apparel Other Light Manufactures Services Utilities and Construction Trade and Services
Regions in the CGE Model Canada United States Mexico Central America and the Caribbean Colombia Venezuela Rest of the Andean Community Argentina Brazil Chile European Union Rest of the World (ROW)
Exports by Major Partner M arket Share (%) 90 80 70 60 50 40 30 20 10 United States Latin America European Union 0 Canada United States Mexico Central Am erica Colombia Venezuela Rest AC Argentina Brazil Chile European Union Source: FTAA Hemispheric Database, IDB. Notes: Exports in goods, 1997.
Imports by Major Partner Market Share (%) 90 80 70 60 50 40 30 20 10 United States Latin America European Union 0 Canada United States Mexico Central Am erica Colombia Venezuela Rest AC Argentina Brazil Chile European Union Source: FTAA Hemispheric Database, IDB. Notes: Exports in goods, 1997.
MFN Ad Valorem Tariffs by Major Partner 50 45 40 United States Latin America European Union 35 30 25 20 15 10 5 0 Grains Vegetables Sugarcane Livestock Mining Meat Products Processed Foods Textiles and Apparel Other Light Manufactures Petroleum and Chemicals Iron and Steel Automobiles and Parts Machinery and Equipment Average Percent (%) Source: FTAA Hemispheric Database, IDB. Notes: 1997.
Allocation of Domestic Support ($US million) 60,000 50,000 40,000 30,000 Grains Vegetables Sugarcane Livestock Meat Products Processed Foods 20,000 10,000 0 Canada United States Mexico European Union Source: OECD PSE. Notes: 1997.
Allocation of Export Subsidies ($US million) 5,000 4,500 4,000 3,500 3,000 2,500 Grains Vegetables Sugarcane Livestock Meat Products Processed Foods 2,000 1,500 1,000 500 0 United States Mexico Central America Colombia Venezuela European Union Source: WTO Notifications. Notes: 1997.
Regional Agreements in the Model Regional Agreements NAFTA CACM and CARICOM Andean Community MERCOSUR G-3 (Mexico, Colombia & Venezuela) EU Preferential Agreements Caribbean Basin Initiative (CBI) Andean Trade Preferential Act (ATPA) MERCOSUR-Chile Chile-Canada Mexico-Chile Source: FTAA Hemispheric Database, IDB.
Alternative Scenarios for Latin America 1. Scenarios South American Free Trade Area (SAFTA) 2. AC-US FTA 3. MERCOSUR-US FTA 4. AC-EU FTA 5. MERCOSUR-EU FTA 6. FTAA
Impact on GDP by Scenario 1 2 3 4 5 6 SAFTA AC-US MERC. AC-EU MERC. FTAA FTA -US FTA FTA -EU FTA Canada 0.00-0.01 0.02 0.02 0.04 0.57 United States 0.00 0.15 0.20 0.02 0.03 0.35 Mexico 0.00-0.05-0.02 0.01 0.03 1.02 Central America -0.01-0.07 0.00 0.01 0.04 2.22 Colombia 0.28 0.92 0.02 0.95 0.05 1.32 Venezuela 0.37 1.40 0.03 0.59 0.10 2.08 Rest of AC 1.21 1.78 0.07 1.84 0.21 2.98 Argentina 0.61 0.00 1.59 0.46 4.20 2.49 Brazil 0.46-0.01 2.59 0.37 4.94 3.39 Chile 1.14-0.01 0.00 0.04 0.11 2.84 Latin America 0.42 0.17 1.34 0.39 2.78 2.52 European Union 0.00 0.00 0.00 0.51 0.61-0.01
Impact on Exports by Sector: Andean Community % Change 14 12 10 8 6 4 2 Primary Light Manufactures Heavy Manufactures Total 0 Scenario 2: AC_US FTA Scenario 4: AC-EU FTA
Impact on Exports by Sector: MERCOSUR 30 % Change 25 20 15 10 Primary Light Manufactures Heavy Manufactures Total 5 0 Scenario 3: MERCOSUR_US FTA Scenario 5: MERCOSUR-EU FTA
Impact of FTAA on Exports of Latin American Countries 20 15 Primary Light Manufactures Heavy Manufactures Total % Change 10 5 0 Mexico Central America Colombia Venezuela Rest of AC Argentina Brazil Chile
Increased Exports to Hemispheric Market by Sector: FTAA 100% Primary Light Manufactures Heavy Manufactures 80% Share (%) 60% 40% 20% 0% Mexico Central America Colombia Venezuela Rest of AC Argentina Brazil Chile
Share of Latin America in Exports to the Hemispheric Market: FTAA 100 90 80 70 Primary Light Manufactures Heavy Manufactures Share (%) 60 50 40 30 20 10 0 Mexico Central Colombia Venezuela Rest of AC Argentina Brazil Chile
Summary and Conclusions * SAFTA generates modest gains, but can be superior to the North-South arrangement in terms of specialization of high value-added exports * The North-South integration has sectorally differentiated impact on Latin America, depending on partners. * FTAA is the best option for hemispheric partners except MERCOSUR, for which integration with the EU is more preferable. * In the FTAA scenario, Latin America absorbs some 50 percent of the increased exports to the FTAA market. The presence of LAC contributes to increase exports of non-resource-based exports.